The Path Forward

COOPERATIVE MECHANISMS UNDER THE KYOTO PROTOCOL The Path Forward June 1998 EXECUTIVE SUMMARY ............................................ 3 I. INTRODUCTION ................................................. 14 II. KEY ATTRIBUTES OF ENVIRONMENTALLY AND ECONOMICALLY EFFECTIVE EMISSIONS TRADING MARKETS ........................................................... 17 III. EMISSIONS TRADING UNDER THE KYOTO PROTOCOL : A PATHWAY TO CREDIBILITY AND SUCCESSFUL IMPLEMENTATION ............................... 20 A.The Emissions Trading Framework in the Kyoto Protocol .................20 B. Actual Emissions Performance: The Basis of Accountability ..............21 C. Matching Accountability With Flexibility: Cumulative Multi-Year Commitments ...........................................................22 D. Matching Accountability With Flexibility: The Role of Emissions “Savings” ...............................................................22 E. Matching Accountability With Flexibility: International Emissions Trading ................................................................24 F. Broadening Participation: The Role of the Clean Development Mechanism ..............................................................24 G. The Importance Of Cost Savings ........................................26 IV. THE MECHANICS OF EMISSIONS TRADING UNDER THE PROTOCOL: FOCUS ON ENVIRONMENTAL PERFORMANCE AND ACCOUNTABILITY ............................................... 28 A. The U.S. Acid Rain Program: An Example ..............................29 B. The Mechanics of Annex B Emissions Trading: Focus on Assigned Amounts and Actual Emissions ..................................30 C. Trading Under Article 6 ................................................33 1. Project Baselines and “Additionality”: A Matter of Sovereign Discretion .........33 2. Project-Based Trading Under Article 6: One Option for Emissions Trading ..................................................................34 D. Trading under the Clean Development Mechanism: Early Start and “Additionality” .......................................................35 1. The Importance of Early Action ...........................................36 2. “Additionality” and Baselines: Focusing on Actual Emissions .................37 3. “Leakage” and “Loopholes” ..............................................39 4. “Financial Additionality”: Not An Appropriate Test ...........................39 V. THE RULES FOR ACCOUNTABILITY UNDER ARTICLE 17: TOOLS FOR ASSURING THE INTEGRITY OF THE KYOTO PROTOCOL ..................... 40 A. Compliance “True-Up” .................................................42 B. Automatic Deduction ..................................................42 C. Making the Environment Whole: Repaying The Atmospheric Debt .........43 D. Tracking Compliance within the Commitment Period .....................44 VI. THE ROLE OF ARTICLE 17 ACCOUNTABILITY FOR EMISSIONS TRADING IN THE WIDER CONTEXT OF PARTY NONCOMPLIANCE: CREATING INCENTIVES FOR SOVEREIGN COMPLIANCE ...................................................... 44 A. Automatic Deduction ..................................................47 B. The Discount ..........................................................49 C. Prohibiting Sales and Transfers ........................................52 VII. A COMPREHENSIVE REPORTING SYSTEM FOR EMISSIONS PERFORMANCE AND TRADING ........... 52 A. Measurement and Reporting: Vintaging .................................52 B. Reporting and Tracking of Trading ......................................54 C. Reporting and Accountability ...........................................55 VIII. MEASUREMENT and QUANTIFICATION ............... 56 IX. DOMESTIC ACTIONS: INSTITUTION-BUILDING AND EARLY ACTION STRATEGIES ............................ 58 Meeting the Initial Challenge: A Market Mechanism to Spur Reductions and Jump-Start the Emissions Trading Market ..................58 X. ISSUES IN CONFLICT ........................................ 62 A. Cap on Trading: “Supplementarity” ....................................63 B. Emissions Trading and Economies in Transition ........................64 C. “Forward Sales”: Trading Without Rules? ...............................67 XI. CONCLUSION .................................................. 68 BACKGROUND NOTE ............................................. 70 Cooperative Mechanisms Under the Kyoto Protocol -- A Paper by EDF EXECUTIVE SUMMARY The Kyoto Protocol, signed in December of 1997, represents a vital step forward in nations’ efforts to address climate change. The Protocol includes legally binding limits on the total greenhouse gas (GHG) emissions of what are generally considered “industrialized” countries (enumerated in Annex B) and key provisions regarding accountability and flexibility. However, many believe that the ultimate success of the Protocol in meeting its emissions control objectives depends on three developments: the identification and adoption of cost-effective options for compliance, emission reductions activities that start well before 2008, and broad inclusion of Non-Annex B countries over the medium term. Of the many potential compliance methods envisioned by the Protocol, a broad suite of methods, utilizing various types of flexibility mechanisms and what some call emissions trading, including the cooperative approaches of joint implementation, collective targets, and trading with nations that have not adopted legally binding emissions commitments, was expressly incorporated in Protocol language which establishes a framework for market-based emissions trading and related systems. As this paper demonstrates, such flexibility and market mechanisms provide important pathways to achieving the multiple objectives of successful implementation of the Protocol, achievement of early reductions, and participation of all nations, including developing nations. After careful review of the Protocol and based on experience with emissions trading programs both in the United States and abroad, EDF has developed this paper to explain how flexibility, emissions trading and the closely related Kyoto Protocol mechanisms of joint implementation, collective targets or “bubbles”, and the Clean Development Mechanism, provide a viable and useful implementation strategy for nations. At the same time it identifies those aspects of the Protocol’s framework which need to be further addressed in Buenos Aires and it offers suggestions for addressing these issues. The policy makers who will meet, or be represented, at the Fourth Conference of the Parties (COP-4) in Buenos Aires this November face both an enormous challenge and an enormous responsibility. Many believe that the devastating effects of extreme weather events that have always been a part of the climate system could turn out to be, from the retrospect of the next century, an advance snapshot of what may befall the planet on a much more frequent and intense basis if human activity continues to result in emissions that interfere with the climate system. Meanwhile recent events involving nuclear arms proliferation and news about the volatility and interdependence of economies in developed and developing nations around the world offer sharp reminders of the importance of international cooperation in confronting common threats. -3- Cooperative Mechanisms Under the Kyoto Protocol -- A Paper by EDF This paper, for which we welcome comments and suggestions for possible future revision, is broken into eleven sections and is designed to provide detailed background on the points outlined in this Executive Summary.1 I. Introduction The Kyoto Protocol on Climate Change provides: w a first period for GHG emissions reduction commitments for industrialized nations (and any other nation that so chooses) from 2008 to the close of 2012; w specific commitments by industrialized nations to reduce GHG emissions during this period by 5%, on average, below 1990 emissions levels; and w a framework for trading “assigned amounts” of emissions and “certified emissions reductions,” and the use of collectively adopted commitments, as means of achieving emissions reduction commitments. From an environmental perspective, these legally binding emissions reduction commitments, if achieved, are a first step consistent with the goal of limiting warming to one degree Centigrade during the next 100 years. Failure to achieve these reductions, however, would likely lock the world into a rate of warming that in the view of many ecologists, would constitute dangerous interference with the climate system. From an economic perspective, the link between GHGs and fundamental economic activities cause many to fear that the cost of limiting their emissions will be high. For this reason, others question the capacity of any international agreement to establish a truly durable and efficacious regime for limiting these emissions. These concerns are brought into full relief when combined with concerns about the role of developing nations in contributing to climate change and their current exemption from the GHG emissions limitations under Kyoto Protocol. Mindful of these challenges, which, of course, were prominent even before the COP-3 in Kyoto, EDF first introduced a concept of “emissions budgets” at the February 1996, meeting of the Advisory Group on the Berlin Mandate (AGBM) in Geneva at the invitation of the Netherlands. A year later, after developing this concept extensively and seeing it incorporated in the United States’ January, 1997 proposal to the negotiations, EDF published “Emissions

Load more